A Difficult Balance

Relations between countries have never been so important. Jeremy Richardson reviews the Copenhagen Accord - and discusses the future of the Clean Development Mechanism market

While the Copenhagen Accord provided much less of a step forward in tackling climate change than was hoped for, it's probably what we should have expected given the complexity of the decisions required.

On the positive side, the Accord recognises the goal of keeping global temperature rises below 2oC. It requires developed nations to submit emissions reduction targets for 2020 in 2010. Developing countries, such as China, India and Brazil, must submit plans to mitigate climate change, while least-developed countries are to make voluntary submissions on actions they will take.

Importantly, independent verification of emissions reductions was also accepted for internationally-funded emissions reduction initiatives and significant levels of funding for developing countries were agreed, with developed countries committing to spend $10B a year in the next three years, rising to $100B by 2020.

One of the more interesting events was the Mayors' Summit, bringing together the leadership of cities from around the world.

With urban areas producing 75% of greenhouse gas emissions globally, cities are very much on the front line in terms of climate change. Many are beginning to recognise this and are implementing measures such as the promotion of electric vehicles or encouragement of building insulation. [See page 16 for more on cities].

The summit also emphasised the role of the private sector in delivering emissions reductions. This reflects the approach adopted in the UK for initiatives such as eco-towns where the government has been supporting the private sector to come forward with proposals.

However, the Accord is being regarded as a failure by many, as no global or developed country targets for emissions reductions by 2020 or 2050 were agreed.
Crucially, the Accord itself has no legal status, meaning there is no mechanism to hold countries to their commitments.

Developing countries argued that developed nations should provide more funding to help the developing world mitigate and adapt. There is also much detail to be agreed on the tools developed to tackle the root causes of climate change.

Point Carbon, the carbon market website, reported that uncertainty created by these issues led to a 10% drop in the price of carbon following the summit. In particular this fall reflected the fact that the EU is now unlikely to agree to move its target of 20% emissions reductions by 2020 to its more ambitious target of 30%. This uncertainty is not conducive to attracting the significant amount of private sector funding required to help meet commitments set out in the Accord.

TensionsThe conference itself was in some ways more revealing than the final Accord, especially in terms of understanding the tensions that will need to be resolved in the future if the Accord is to have any chance of success.

The breakdown in negotiations between developing and developed countries highlights the dilemma facing developed countries, which bear responsibility for the
majority of historical global emissions and want to act to reduce them - without impacting on the standard of living of their citizens while other countries continue to increase emissions. Developing countries want assistance from developed nations to help reduce the carbon intensity of their economies and least-developed countries need help to adapt to a world with a more uncertain climate and access to low carbon technologies to support development. This will require large levels of funding, with some developing countries mentioning figures such as $400B a year.

Developing countries exercised their political power by walking out of the negotiations, refusing to have a deal forced on them and insisting on the continuation of the Clean Development Mechanism (CDM) of the Kyoto Protocol.

This mechanism allows developed countries to invest in developing country emission reduction projects for which they gain credits, which can then be claimed by the country making the investment. This helps ensure developing countries' interests could not be forgotten in future negotiations.

What is also clear is that the traditional distinction between developed and developing countries is becoming less relevant.

Rapidly developing countries such as China, India and Brazil do not want to compromise their ability to enjoy rapid economic growth, whereas least-developed countries and small island states are becoming more concerned about their increasing vulnerability to climate change.

Funding and the role of the private sector Where there is some level of agreement, certainly amongst donors, is the role the private sector will have in raising the finance required to provide the significant funding from developed countries over the next decade. One suggestion is that the trillions of dollars invested in pension funds in developed countries could be mobilised to invest in greenhouse gas reduction projects and new technologies.

Private sector capital needs to be incentivised to invest in developing countries in order to offset the risks involved. The CDM is the only approach to incentivise private sector investment in developing countries by generating carbon credits which can be traded. The new technology and forestry mechanisms will need to similarly incentivise investors if they are going to take on investment, construction, operation and verification risks.

While some argue that CDM and carbon offsets are problematic on a moral and practical level, it should be remembered that CDM does incentivise private sector investment in developing countries and without it that money would never find its way to such geographies. And the number of credits that can be claimed through CDM is restricted, meaning companies in the UK still need to invest in their own
emissions reductions.

Although the Accord requests that work on the CDM continues, there is a need for greater clarity on its future. To encourage more private sector investment, the market needs to know the volume of credits required by the EU and other potential schemes such as the USA. The process of approving projects also needs to be speeded up and the basis for decisions on which projects qualify for credits needs to be made more consistent. According to Point Carbon, last year only 135M carbon credits were issued, significantly less than market expectations of 1-1.3B and even lower than the total issued in 2008.

Up to now the CDM has been mainly about the transfer of funds and credits between the EU and China, with smaller but still significant investment in countries such as India and Brazil. Regions such as sub-Saharan Africa - which also desperately need investment - have seen very little CDM activity as the perceived risks are greater and the size of the projects and ability to operate is more constrained. This needs to change.

At Scott Wilson we are developing several CDM projects in Africa. Drawing on nearly 80 years of working in Africa we are engaging with host governments in creating what is sometimes their first CDM project. Several large banks and funds are willing to invest in carbon reduction projects in Africa and potentially take some of the risk. There are also a number of insurance brokers which can provide quotes that address construction, political and operational risks in countries such as Liberia.

We are finalising the approval of a CDM landfill gas flaring project in Liberia. The project has been validated and various banks and funds, as well as two insurance brokers, provided quotes for off-take agreements and insurance. This process has been facilitated by Scott Wilson's long experience in Africa and our infrastructure expertise.

Our work in bringing together investors, carbon credit buyers, and the insurance industry - together with our technical, environmental, social and project management skills in CDM programmes in some of the least-developed countries - demonstrates the potential for mobilising private sector capital even with the surrounding uncertainty around both policy and credit. I believe our experience bodes well for raising the funds set out in the Copenhagen Accord.

Meeting our moral responsibility In the future, there will be a greater number of mechanisms and markets so we need to improve levels of certainty and flows of funding. Ensuring that least-developed countries also receive private sector investment will remain a challenge but is in my view essential.

Whatever the solution, it is clear that developed countries have a responsibility and a practical imperative to help developing countries address climate change.

Without this, countries with the least responsibility will suffer the most and/or eventually become significant polluters themselves.

Copenhagen is a prelude to the really tough negotiations that will take place in Mexico. This is where we need greater clarity on targets and the legal status of the Accord agreed. On the evidence of Copenhagen, I believe the relationship between developed, developing and least-developed countries will continue to be critical if an agreement on targets is to be finalised. In turn, agreements on funding and the role of the private sector will form an essential part of those negotiations on targets.

Thankfully, we already have most of the technologies required. The Stern report also showed it is economically worthwhile to invest in mitigation and that the 1-2% of GDP requirement is manageable, especially when put in the context of the amount of money that has been used to bail out the world's banks over the past 12 months. Work on the CDM by organisations with experience and expertise, such as Scott Wilson, shows that it is possible to ensure that investment also reaches the least-developed countries, which will make a real difference on the front line of the battle to combat this global crisis.
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Jeremy Richardson is head of climate change advisory services at Scott Wilson